Answer to Question #95237 in Macroeconomics for komal

Question

2. what are the differences between the Fisherian and Cambridge versions of the quantity theory of money?

Answer 1

The Cambridge approach is realistic as it emphasizes on capital and introduces the human motives in determining price levels. The fisherian approach is mechanical, it shows a relationship tha is direct and proportional between price levels and money supply.

Fishers approach only considers quantity of money as the primary determinant of price levels making it one sided. The Cambridge approach recognizes demand and supply of money as key determinants of value for money.

The Cambridge approach is broader and defined since it considers income levels and changes in key determinants of price levels. Fishers theory ignors income levels and makes price levels depend on the quantity of money and aggregate transactions.

Another difference is that the Cambridge approach applies general demand analysis to the case of money. It considers utility of money.

The Cambridge approach defines its equations in a better and realistic manner compared to the fisherian equation.for example, in fisherian equation, T represents total transactions while in the Cambridge T refer to final goods and services.

Fisher also argued that change in price levels depend on changes in the quantity of money. Cambridge theory argue that price levels may change without any changes in the quantity of money.